How unresolved dividend backlog issues impact the Pakistani rupee

WEB DESK: JPMorgan has recently raised concerns about the potential impact of dividend backlogs on the Pakistani rupee (PKR), which could lead to a weaker currency in the near term.

The agency suggests that there may still be some informal restrictions on the repatriation of dividends. If these restrictions are fully removed at the commencement of the Extended Fund Facility (EFF), the USD/PKR exchange rate might rise moderately over the coming months.

On a positive note, eliminating these restrictions would lead to a more transparent economic environment, free of formal or informal foreign exchange limitations. This would enhance investor confidence and make dollar-based investments in Pakistan more attractive.

The Pakistani currency can come under significant pressure due to unresolved dividend backlog issues, which can impact its stability and value. Dividend backlogs arise when companies delay or withhold payments to shareholders, causing ripple effects across the financial system and affecting the broader economy.

One major consequence of these unresolved dividend issues is a decrease in confidence among foreign investors. Delays in dividend payments can signal potential financial instability or management problems, leading to a decline in foreign direct investment (FDI)—a critical factor for supporting the rupee.

Reduced FDI means fewer foreign funds entering the country, which can contribute to a weakened currency.

Additionally, unresolved dividend backlogs can disrupt the balance of payments. Shareholders awaiting dividends may seek to repatriate their funds, increasing demand for foreign currency and further pressuring the rupee.

This imbalance in demand and supply exacerbates the rupee’s depreciation, resulting in a more volatile exchange rate.

The effects extend beyond currency markets. Prolonged delays in dividend payments can affect the liquidity of domestic financial institutions.

Companies struggling with dividend payouts may encounter operational challenges, potentially leading to broader economic instability. This instability could deter both local and international investors, compounding the negative effects on the rupee.

In summary, unresolved dividend backlogs undermine investor confidence, disrupt the balance of payments, and strain financial institutions.

These factors collectively contribute to the depreciation of the Pakistani rupee, underscoring the need for timely and effective management of dividend payments to stabilise the currency and foster a more robust economic environment.

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